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The ABCs of HSA FAQs -- How do HSAs work and do you meet the HSA requirements?

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What is an HSA (Health Savings Account)?

HSA stands for Health Savings Account. It’s a special account that gives you tax advantages for putting money aside to pay for qualifying medical costs. Like all accounts that have tax benefits, HSAs have certain IRS requirements and rules. Once you understand how an HSA works, you can decide if it’s the right choice for you.

How do you open an HSA?

You must meet certain legal requirements to open an HSA. First you must have what’s called a high-deductible health plan (HDHP). For 2019, this means your plan must have a deductible of at least $1,350 for single coverage or $2,700 for family coverage.1 But another requirement is that your deductible can’t be too high, so check to see what your health plan’s cap on maximum out-of-pocket expenses is. In order to qualify for an HSA, your annual medical out-of-pocket expenses can’t exceed $6,750 for an individual and $13,500 for a family.2

How do you open an HSA?

Unlike an FSA (Flexible Spending Account) or an HRA (Health Reimbursement Account) that has to be opened and managed by your employer, an HSA is an account you can open yourself, either through your health insurance company or at a bank or financial institution that offers them. HSAs are also offered by employers to employees, and can be funded by the company, the taxpayer, or a combination of the two.

How can I save money with an HSA?

An HSA lowers your tax burden because it’s funded with your gross, pre-tax earnings. Pre-tax contributions lower your income by every dollar you put in. For example, if you make an annual salary of $50,000 and fund your HSA with the family annual maximum of $7000, you only have to pay taxes on $43,000 for that year.

What are the main advantages of an HSA?

An HSA is unique in several ways. First, it’s the only kind of medical expenses account that offers a triple tax savings advantage. It’s also the only kind you can grow and draw from at any time — even years after you spend on qualifying expenses. Key benefits of an HSA include:

  • No income limits for opening one
  • No deadline to use the funds — you can let it grow for years if you like and reimburse yourself at any time — even decades after you paid for qualifying expenses
  • Portability — you can take an HSA with you from employer to employer and keep it if you leave the workforce or retire
  • A triple-tax advantage:
    • It lowers your taxable income because it's funded with pre-tax contributions
    • Interest on any growth is tax-deferred
    • Withdrawals are tax-free when used for qualifying expenses

    Where can I open an HSA?

    You may be able to open one through your employer’s health plan or can do it through a bank or financial institution that offers them. Go to https://www.hsasearch.com/custodian-search/ to search for options in your area.

    Is there an annual limit on what I can put in an HSA?

    Yes. For 2019, you can contribute up to $3,500 to an HSA if you have single coverage or up to $7,000 for family coverage. And if you’re 55 or older anytime in 2019, you can contribute an extra $1,000.3 The IRS can change the limits each year.

    How do I withdraw money from my HSA?

    Some HSAs have a debit card to pay for expenses directly and others come with checks you can use to reimburse yourself for expenses.

    Do I have to use the money in my HSA by the end of the year?

    No, with an HSA you have the flexibility to roll the money over year after year and reimburse yourself for qualifying expenses whenever you want.

    What happens to my HSA after retirement?

    You can let the money in your HSA grow and reimburse yourself at any time — even after you retire. Because of this feature, an HSA is also known as a “sleeper retirement account4.” For example, let’s say you build up your HSA over the years to $70,000 and the money grows to $100,000. You can withdrawal the $70,000 tax-free (as long as you’ve kept receipts and records to show you’ve spent that much on qualifying expenses) and still have $30,000 left in the account.

    Do I ever have to pay taxes on the money I withdraw from my HSA?

    Only if you use it for non-qualifying expenses. The beauty of an HSA is, if used for eligible expenses, it offers a triple tax-free advantage: The money going in lowers your taxable income, it grows tax free (you don’t have to pay taxes on any interest or gains) and you don’t have to pay taxes on what you take out.

    What happens if I use my HSA for non-qualified expenses?

    If you withdraw from your HSA before age 65 for non-qualified expenses, you’ll be taxed at your regular tax rate and get hit with a 20% penalty5. If you withdraw from it for non-qualifying expenses after the age of 65 or if you become disabled, you’ll be taxed at your regular rate but will avoid a penalty.

    What are HSA eligible or qualified expenses?

    HSA qualifying expenses include6:

    • Acupuncture
    • Artificial Teeth
    • Bandages
    • Birth Control Pills
    • Braille Reading Materials
    • Contact Lenses
    • Fertility Enhancement
    • Hearing Aids
    • Mental Health Services
    • X-Rays

    Please note that the IRS can modify its list at any time. For a full list of HSA qualified medical expenses, go to www.irs.gov or consult with a tax advisor.

    What expenses do not qualify for an HSA?

    HSA non-qualifying medical expenses include7:

    • Cosmetic Surgery
    • Diaper Service
    • Nursing for a healthy newborn
    • Hair Transplant
    • Nutritional Supplements
    • Teeth Whitening
    • Electrolysis
    • Maternity Clothes
    • Veterinary Fees
    • Childcare

    Please note that the IRS can modify its list at any time. For a full list of HSA qualified medical expenses, go to www.irs.gov or consult with a tax advisor.

    Are there any drawbacks to opening an HSA?

    With an HSA it literally pays to be an organized, meticulous keeper of receipts and records — and costs you if you’re not. In order to avoid paying taxes on the funds, you must prove you spent the money on qualifying expenses. When deciding whether or not to open and HSA, consider whether you’re committed to managing the necessary paperwork. If not, you probably won’t be able to enjoy the full benefits of an HSA.

    How do I know if an HSA is right for me?

    First, make sure your health plan qualifies as an HDHP. Then consider how much you spend each year on HSA-qualifying expenses and be honest with yourself about whether you’re up to the task of managing the necessary paperwork and record-keeping. If used properly and maximized for growth, an HSA can be one of the best ways to gain tax advantages while paying for healthcare expenses.

    Sources:
    1 “Health Savings Account Limits For 2019,” Kimberly Lankford, 8/28/18. Retrieved from: https://www.kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html
    2 “2019 HSA Contribution Limits Released By The IRS,” Discovery Benefits. 5/10/18. Retrieved from: https://www.discoverybenefits.com/blog/posts/2018/05/10/2019-hsa-contribution-limits-released-by-the-irs
    3 “HSA Contribution Limits for 2019 And More HSA Rules You’d Better Know,” Adelia Cellini Linecker, 11/20/18. Retrieved from: https://www.investors.com/etfs-and-funds/personal-finance/hsa-contribution-limits-hsa-rules/
    4 “Making Retirement Lemonade From Health Insurance Lemons,” Carla Fried, 8/7/17. Retrieved from: https://www.cnbc.com/2017/08/07/making-retirement-lemonade-from-health-insurance-lemons.html
    5 “Health Savings Account (HSA) Contributions And Out Of Pocket Maximums,” Peter Anderson, 11/1/18. Retrieved from https://www.biblemoneymatters.com/health-savings-account-hsa-contribution-limits-and-out-of-pocket-maximums/
    6 “Qualified Medical Expenses,” hsacenter.com. Retrieved from: https://help.ihealthagents.com/hc/en-us/articles/225001688-What-are-Qualified-Medical-Expenses-I-Can-Pay-for-With-My-HSA-Account-
    7 “Qualified Medical Expenses,” hsacenter.com. Retrieved from:
    https://www.peoplekeep.com/blog/comprehensive-list-of-hsa-eligible-expenses
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This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other advisors and/or medical providers with respect to any information presented. Synchrony and any of its affiliates, including CareCredit,(collectively, "Synchrony") makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. Your receipt of this material constitutes your acceptance of these terms and conditions.
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